Events

Prof. Pinchuan Ong
Assistant Professor of Strategy and Policy
NUS Business School
National University of Singapore

Economists conventionally do not distinguish between labor supply responses to wages and taxes in any substantial way. We show that in the presence of social preferences, the wage elasticity of labor supply differs in general from the net-of-tax rate elasticity of labor supply. We field a large-scale vignette experiment in the US and find that wage elasticities of labor supply are meaningfully larger than their net-of-tax rate counterparts, consistent with positive social preferences towards tax-funded government expenditure. To assess external validity for real labor-market decisions, we additionally build on a meta-analysis of the elasticity of taxable income (ETI) and show that ETI estimates are correlated with real-world proxies for government-related social preferences. Hence, models calibrated using net-of-tax rate elasticities when wage elasticities are more suitable tend to underestimate the labor supply response of individuals.